Separating Your Rainy Day Fund from Your Retirement Savings
Saving for a rainy day and saving for retirement aren’t the same thing at all. In fact, if you want to keep your retirement safe and sound, the two should never meet.
According to State Farm, over half of Americans don’t have any emergency savings to speak of. Where does the money come from when the unexpected happens? More than likely, it comes from the retirement fund. And that’s a risky game to play.
Rainy Day Funds Should be Easy to Access
Most financial experts recommend saving no less than 3 to 6 months worth of living expenses, with 6 to 9 months being a safer amount to work toward. This gives you a cushion to fall back on in case you lose your job or face a major expense.
As important as how much you’ve saved is where you keep it. Rainy day money isn’t hard working; its main purpose is to be there as a safety net when you need it. This savings should be quick and easy to access, and it should not come with large penalties for withdrawal.
Retirement Funds Need Time to Grow
The money that you’ve set aside for a rainy day and the money you’re saving for retirement are the same in some ways. For example, they both exist to protect you in times when you have little or no income. But your retirement fund also has a special purpose, and that is to grow as much as possible before you retire.
One of the best ways to encourage growth is by investing in a 401k and IRA. Both of these come with penalties for early withdrawal, and they aren’t easy to access. If you dip into investments for emergencies, you’ll make a serious dent in your retirement.
You’ll want a little cash on hand, but keep the rest safer.Keep Some Rainy Day Money in Cash
Your rainy-day fund shouldn’t be difficult to access, but it also shouldn’t become a negative investment, as Nichloas Yrizarry, president and CEO of Wealth Management Group in Laguna beach, CA, tells USA Today.
You’ll need some money immediately accessible in cash, but consider keeping the remainder of your emergency savings in money market funds or a money market account. These earn interest, are easy to liquidate, and come with low or no penalties for withdrawal.
All savings isn’t the same. When you mingle rainy-day funds with retirement savings, one goal or the other is being shortchanged. And there’s a real risk of dipping into retirement to pay for an emergency if you don’t keep them separate. By assigning your emergency funds to an account that’s easy to access, your retirement can grow undisturbed.
Keeping all of your savings in one spot might be the easiest way to manage your money, but it’s definitely not the best in the long run. Treat each savings goal as a unique entity, and you’re more likely to have what you need, both in an emergency and at retirement.